Inheritance planning
Tax-efficient investing helps clients to achieve their planning goals, one important example of which is estate planning. This is something that is becoming one of the most important elements of an adviser’s work. Clients have carefully built wealth up during their lifetime and most want to leave as much as possible to their loved ones, whilst enjoying a comfortable old age.
Clients’ needs are changing and many are now keen to retain access to assets later in life. In a recent survey of 700 advisers undertaken by Octopus, 79% said that clients were becoming more mindful of this than they were five years ago.
Anybody doing estate planning will have been shown through cash flow modelling that they can comfortably give away wealth. But clients can still be reluctant to give up access to their assets during their lifetime, making lifetime gifting an unattractive option.
Most inheritance tax planning strategies don’t allow for continued access to wealth. However, Business Property Relief (BPR) qualifying investments give clients the potential to do both.
BPR-qualifying investments are made into certain unquoted companies or companies listed on the Alternative Investment Market (AIM). If a client has held a BPR-qualifying investment for two years, and still holds the shares on death, that investment becomes zero-rated for inheritance tax.
Unlike many other types of inheritance tax planning, with BPR it’s possible to start a client’s planning to maximise the amounts left to the next generation, without giving up access to that wealth later on if needs change. A BPR-qualifying investment stays in the client’s name, so if a client’s circumstances change and they need to access some or all of it, they can request to make a withdrawal, subject to liquidity being available.
In practice, most investors tend to hold the investment for the rest of their life, but they know they can request to sell some or all of it at any time. For those comfortable with the additional risks, this can make a big difference to peace of mind and willingness to take action.
Conversations around BPR typically involve moving money from one investment to another. Clients know their adviser for making investments, so this is all familiar ground.
Growing your business
Offering the full range of tax-efficient investments is good for advisers too. It’s an opportunity to grow your business through existing clients.
Estate planning in particular is a great way for advisers to grow assets under management.
Often it involves expanding into unadvised assets such as cash savings or funds from the sale of a property. 40% of advisers we surveyed said recommending these types of investments had led to them advising on client assets they hadn’t previously.
Most advisers will have clients suitable for specialist tax-efficient investments. In fact, 65% of those in the Octopus survey had identified clients who would be suitable. And 39% said advising on these investments ensured they did not lose clients to another firm or wealth manager.
These investments also add value to client annual reviews. The client can see you’re continuing to try to create opportunities and help them, even if they don’t ultimately choose to make an investment.
The industry is preparing for ‘The Great Wealth Transfer’ over the next 30 years, when an estimated £5.5 trillion is due to be passed between generations in the UK. As things stand, the bulk of those transfers will go to beneficiaries who are not currently being advised.
By engaging with the next generation through estate planning with existing clients, these future beneficiaries can become future clients.
Advising on specialist tax-efficient investments such as VCTs, EIS and BPR is also a great way to establish a reciprocal client referral process with accountants and solicitors. These types of clients will likely need guidance from all three professions.
For these many reasons, gaining a deeper knowledge of tax-efficient investment options, and having the capability and confidence to advise on them, is not just sensible, it’s a valuable part of an adviser’s toolkit.
Paul Latham is Managing Director of Octopus Investments
